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Shai Heffetz

Additional $115m raised by Spotify ahead of showdown with Apple

Spotify recently sold off 1.4% of its stock for $115 million. This comes hot on the heels of a showdown with Apple Inc (AAPL) over plans by the tech giant to enter the lucrative music streaming business. The funding was secured from a Swedish telecom company known as TeliaSonera.
The 1.4% purchase by TeliaSonera comes at a critical time for Spotify, which is now at loggerheads with Apple Inc. As part of the purchase agreement, TeliaSonera will work closely with Spotify on all manner of issues, including analytics, advertising, customer insights and media distribution matters.
The round of funding is significant as it reveals that there is tremendous support for Spotify in its efforts to stave off threats posed by Apple. Since it closed its latest round of funding, the company was valued at a staggering $8.53 billion. The round of financing which totalled $526 million was closed on Tuesday 9 June 2015.
Spotify and TeliaSonera have maintained close links for several years. The two companies began cooperating in 2009 and the chairman of Spotify – Martin Lorentzon – has even served on the board of TeliaSonera since 2013. Since both companies have roots in Sweden, both are key players in the Swedish telecom sector.
Other investors involved in Spotify’s new round of fundraising include Discovery Capital Management, Senvest Capital (a Canadian fund manager), Baillie Gifford, Rinkelberg Capital and Landsdowne Partners.
There are several US investors on board too, including Technology Crossover Ventures, Halcyon Asset Management, GSV Capital and P Schoenfeld Asset Management among others. During this round of funding, additional resources were also secured from an Abu Dhabi sovereign wealth fund.

Crunching the numbers: Spotify paid subscribers number 27% of users

Spotify’s expansionary prospects include new content forms. But now that Apple is weighing in on the market, by way of Apple Music, there are jitters in the Spotify camp. Apple Music is a subscriber-based system of music streaming, which also includes an around-the-clock online radio station. For its part, Spotify sports an active subscriber base of 20 million subscribers who pay, and a monthly user base of 75 million subscribers.
Pandora Media’s current market cap is in the region of $3.5 billion, but this new round of funding for Spotify has pushed its market cap upwards of $8.53 billion. Interestingly enough, both Pandora Media and Spotify operate in the red since they share many of their revenues with music partners. Apple Music will offer a subscription service starting at $9.99 monthly following a three-month trial.

What will Spotify use the new funding for?

Spotify wants to diversify its product offerings to different forms of media. Among others, Spotify intends to add podcasts and videos from several of its operating partners including Comedy Central, ESPN, Conde Nast and NBC. In September 2014, GSV Capital valued Spotify at $5 billion. All in all, Spotify has raised in excess of $1 billion. It is also now one of ten companies to raise over $500 million in equity funding in 2015 alone.
The big appeal of Spotify is that it allows users to enjoy free streaming music, in addition to a paid monthly service for offline music sans commercial interruptions. The service boasts an impressive 30 million songs and there are over 20,000 songs added daily. Apple Music is expected to launch within the next two weeks.
Despite Spotify’s massive funding, it remains an unprofitable venture. In 2014 alone, the company’s operating loss topped $197 million on revenues of $1.3 billion. A big portion of the company’s revenues go towards royalties – with over $3 billion paid out since 2008.
During January, February and March of 2015, Spotify paid out an additional $300 million in royalties to rights holders. While there are no details of ownership at Spotify, it is clear that the company has maintained an active user and investor base in the run-up to the showdown with Apple Music.

Pros and cons of Spotify vs Apple Music

Both Apple Music and Spotify Premium retail at $9.99 per month. Apple Music has a three-month free trial while Spotify has 30 days free, or three months for $0.99. Apple Music does not have a free tier while Spotify Premium does (but it is ad-supported).
Apple Music has a Family Plan at $14.99 for up to six users and for Spotify Premium there is 50% off for additional accounts with a fee of $29.99 for five users. The Max Streaming Quality for Apple Music is 256 kbps while for Spotify Premium it is 320 kbps for premium users.
In both instances it is clear that music sales are declining and that streaming is where it’s at. Apple needs a subscription-based model to update its iTunes model of one-off music sales. Failing the adoption of a subscription-based model, Apple’s music model risks ruin. For Apple though, the launch of Apple Music will be delayed for the majority of smartphone users.
Since only Mac and iOS users will have access to it on 30 June, all Android and Windows users will have to wait till the autumn. All in all, the Apple brand will draw plenty of users to its ranks but Spotify is beating its chest alongside one of the biggest names in the tech sector and that is all the free advertising they’ll ever need.
Brett Chatz
Intertrader.com
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The content of this article is the personal opinion of the author and not Intertrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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